Solid rise on Goldman results, FOMC optimism
Small-cap stocks opened solidly higher, boosted by a positive reaction to key profit reports and optimism ahead of the FOMC meeting this afternoon. Financial and banking shares were on the mend today after being noticeably weak in recent days, helping to counter any dread from this morning’s gloomy housing starts report. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was up 8.22, or 1.82%, at 460.78.
The housing starts report came out at 625,000 units, well off the projected pace of 730,000. What’s more, the percentage decline was a whopping 18.9%, the largest drop since March 1984 and the unit rate was the lowest on record. Clearly, these are awful numbers … bulls might argue this is the bottom, but there is no sign of stabilization yet. The dreadful housing starts report appeared to take some starch out of pre-market index gains. CPI data also came out this morning, with the headline number down 1.7%, which was below the forecast of minus 1.2%. The CPI data were expected to be down with sinking energy costs and weren’t much of a factor for the market.
Now that housing starts and CPI are out of the way, economic watchers will focus on this afternoon’s FOMC statement. It is widely expected that the Federal Reserve will slash another 50 basis points off the Fed funds rate, lowering the rate to 0.50%. The big key will be the language accompanying the statement, as market watchers look for signs that the Fed will explore other options to lower rates beyond the Fed funds target. However, don’t completely discount a potential surprise on the rate cut announcement: this morning, Fed funds futures were actually pricing in a 68% chance for a 75-bp rate cut, and there were some analysts calling for the Fed to go ahead and just put the rate at zero, since they appear to be headed that way anyhow.
On the profit front, Best Buy Co. Inc. (NYSE:BBY) smashed the estimate, coming in at $0.35 versus the forecast for $0.24, with revenue up 16%. BBY shares were up 11.1% shortly after the open. It’s worth noting however, that this coming quarter is the key one for retailers, and so far returns on holiday shopping have been hit and miss. The market also got numbers from Goldman Sachs Group Inc. (NYSE:GS) as the venerable Wall St. investment bank posted its first quarterly loss since going public back in 1999. Goldman reported a net loss of $2.12 billion, or $4.97 a share, which was quite a bit worse than the forecast for a loss of $3.73. Moody’s cut Goldman’s credit rating and said the firm’s outlook remained “negative.” Still, GS stock rallied in pre-market trading after the news and was up 4.3% shortly after the open, so apparently investors were just happy to see Goldman pony up and admit the loss.
Crude oil prices were on the rise this morning, up about $1.30 per barrel ahead of the open, which should provide a boost to energy stocks. Commodities in general stand to benefit from a steep decline in the U.S. dollar, which makes commodity goods priced in dollar terms more attractive. That said, base metals were weak overnight, including copper, lead, tin and nickel. In addition, coal companies took a hit overseas, which bears watching on the U.S. front today.
Individual small caps on the rise this morning were dominated by financial entities, big and small. Outside of that arena, the Pennsylvania Real Estate Investment Trust (NYSE:PEI) jumped 12.1% on news that the company completed a financing deal. Factset Research Systems Inc. (NYSE:FDS) surged 10% as the financial information provider reported solid earnings.
Looking at the chart structure, the market continues to bounce off intraday slides and has been trading in sideways fashion in recent days, a noticeable break from the previous pattern of steep losses followed by quick, failed bounces. If the market can hold above 461 during the session, then the next key point is at 473 (which was the previous range peak from the Black Friday high). Above there, minor resistance is at 481.50, but the key upside test is still at 491, which was soundly rejected last time around. On the downside, a slide back below 450 would be troubling, and would leave support at 442 and 434.50.
